Address at the launch of the Austrade publication Islamic Finance

12 February 2010

Melbourne

E&OE speech

I am pleased to launch Austrade's new publication on Islamic finance today.

And I'd like to give a warm welcome to the visiting Islamic finance delegation from the United Arab Emirates.

I am also pleased to be here for the launch of Westpac Institutional Bank's Special Interbank Placement for Islamic institutions – a solution specifically developed for Islamic investors.

Islamic or Shariah-compliant finance offers significant investment opportunities for the Australian financial services industry and a competitive source of offshore capital.

As Trade Minister, I have taken a great interest in promoting the expansion of Shariah-compliant finance into Australia, as part of a push to elevate Australia's sophisticated, efficient and highly skilled financial sector to the world stage. 

Australia's financial services industry is one of the world's most competitive and innovative and is located right on the doorstep of the world's fastest-growing region.  Not only is it competitive and innovative, but it is also one of the safest.

Australia's financial services sector

Australia's financial services sector contributes about 10.8 per cent to GDP and employs about 400,000 highly-skilled and multilingual people.

The strength and competitiveness of our financial services sector is largely a result of the structural reform undertaken twenty years ago.  When the Hawke Labor government came to power in 1983, it inherited a rigid, inflexible economy.  We were constrained by low productivity, regulated markets and high levels of industry protection.  Inflation and unemployment were on the rise.

The Government recognised that a change in direction was urgently required, and that it needed to provide leadership for the long-term benefit of the country. 

Hence, the government embarked upon a decade long program of structural reform; floating the Australian dollar, deregulating the banking industry, reducing tariffs, allowing the entry of foreign banks and making the central bank independent.

These market reforms were not easy to implement.  However, they have left an invaluable legacy, on which we continue to build.  I'd like to highlight a number of outstanding features:

• Australia's compulsory superannuation system has led to the creation of the world's fourth largest pool of investment funds under management.
• In September 2009, its size stood at around A$1.3 trillion, which makes it the largest in Asia.
• Not only did compulsory superannuation create a large pool of invested funds, but it encouraged innovation.
• Australia has the largest stock market in Asia, excluding Japan's, and the sixth largest in the world.
• Apart from funds management, the sector has great expertise in innovative financial products in infrastructure, securitisation, property and trade finance.
• All four major Australian banks are rated AA, out of a total of nine rated AA worldwide, and they remain in the top 40 of the world's banks in terms of market capitalisation.

Recent Performance of Australia's Financial Sector

Our highly competitive and stable financial sector, and the solid performance of the economy during the GFC, makes Australia a highly attractive investment destination.

The World Economic Forum's Financial Development Report 2009 ranks Australia as second amongst the world's financial centres, behind the United Kingdom but ahead of the United States, Singapore and Hong Kong. Australia ranked first in terms of financial access and ranked highly in both banking (fifth) and non-banking (third).  Having a sound financial system, particularly when banks around the world have been attracting such criticism is something for us to be proud of. 

Australia's economy outperformed the other advanced economies in 2009 to be the only one in the OECD to record positive growth of just under one per cent.

The IMF now forecasts the Australian economy to grow by 2.5 per cent in 2010 and 3 per cent next year.

Australia and Islamic Finance

The competitiveness of Australia's financial services sector offers great opportunities for Islamic banks and financial institutions to do business here or export their products to Asia.

It also presents opportunities for Australian-based banks and financial institutions to develop Islamic finance products for domestic and international markets.

The sector has the ability to develop expertise in tailoring products that are of direct appeal to Islamic finance markets.  There are also a number of other key strengths:

• Australia not only has one of the world's largest deposits of natural resources but is the most efficient in the world in extracting and transporting them. The investment and services dimension of the industry has seen huge growth aside from the commodity.
• Australia has developed strong trade, services and investment links with China, India and Africa providing a strong asset base for Islamic financing.
• And the spreading net of Australia's Free Trade Agreements in Asia will allow firms based here to take advantage of new markets and greater access in Asia.

These benefits have been highlighted to key players in the Islamic finance sector in the region.

Australia as a Financial Centre: Building on Our Strengths

I want to ensure Australia has the right policy and commercial framework to become the financial services hub for the Asia Pacific region.

In 2008, I visited Malaysia where I discussed Islamic finance with representatives of Malaysia's financial sector. 

After that meeting, convinced of industry's interest and the opportunities for Australia's financial services sector, I wrote to the then Assistant Treasurer, the Hon Chris Bowen, urging him to consider Islamic finance in the industry led review, Australia as a Financial Centre. This is known as the Johnson Review – a report on how to build on Australia's financial services.

I am pleased to report that these suggestions were taken on board, and with support from industry the Johnson report includes two recommendations on Islamic financial services.

Firstly, the Report calls for a Board of Taxation inquiry into whether Australian tax law treats Islamic finance products on an equal footing with other finance products. The Review found that there are issues with the existence of taxes associated with the transfer of assets. With several of the common Shariah-compliant products normally mandating a double transfer of ownership, the Review noted that asset transfer taxes are a significant additional burden.   

Secondly, the Report proposes the removal of any regulatory barriers to the development of Islamic financial products in Australia. For example, the Forum noted that one task is to determine the regulatory framework applicable to Islamic banks, in terms of the specific activities of the bank and the role of depositors as investors.

Addressing areas of taxation and regulatory reform will make it easier for industry to do business.  I strongly support efforts to ensure Australia has the right regulatory framework to encourage the development of this growing sector.  I also support the recommendations in the review which seek to ensure Islamic finance receives parity of treatment with conventional products.

I will be working very closely with my Ministerial colleagues to ensure we respond positively to these important recommendations and consider the recommendations made by Mark Johnson on boosting Australia's performance in financial services more broadly.

I have long argued that we need to build on Australia's enviable strengths as a financial centre to expand our exports of financial services to the region and beyond.

I was pleased that the Victorian Government in 2004 recognised the importance of a neutral regulatory environment to enable the provision of different types of financial products.  They legislated to this effect to remove the unintended double application of stamp duty to certain Islamic finance transactions.  Both industry and government are committed to ensuring equity of treatment for all financial products. The Government will continue to work closely with industry to remove barriers across the board to assist growth in the financial services sector. 

The Scope of Islamic Finance

We believe that Islamic finance can add to the depth and sophistication of our financial markets.

We also recognise that there are almost 400,000 Australian Muslims who may use Islamic financial services if they are made more accessible.

Fostering Islamic finance here will also open up new education and training opportunities for our universities and tertiary institutions which are widely recognised as centres of excellence.  For example, La Trobe University launched Australia's first Master of Islamic Banking and Finance last year and many Universities now offer subjects on Islamic banking and finance as part of a commerce/accounting/finance degree.

Islamic finance also provides an alternative financing option to all consumers and investors, not just Muslims, especially to those who are interested in ethical investment.

Islamic finance offers a very sophisticated range of financial products which cater to a growing proportion of the world's population.

Islamic financial assets make up just 1 per cent of total global financial assets.

But Islamic finance is one of the world's fastest growing financial practices and is spreading globally.

The UK, for example, now has the eighth largest Shariah-compliant asset market in the world.  In 2001 the UK flagged its intention to become the Islamic finance entry point into Europe. It did this not by providing special treatment to Islamic finance banking and insurance products, but by ensuring Islamic based finance products were given parity of treatment with conventional products.

To realise this ambition the UK in 2005 amended its Finance Act to exempt land tax and stamp duty. This reform sent out a strong statement to the Islamic world by creating a commercial environment which offered a range of Sharia-compliant products.

In November 2009, GE raised US$500 million through the issuance of sukuks, or Islamic bonds, the first major US company to do so.

Other companies, such as Shell and the British supermarket chain Tesco, have also tapped Islamic financial markets for funding.

I am pleased that Australia's interest in Islamic finance has been growing in recent years, with a number of Australian firms developing and launching Islamic finance products for both domestic and international markets.

The most recent example is today's launch by Westpac Institutional Bank of its Special Interbank Placement for Islamic institutions. This is another example of Australian innovation in collaboration with offshore Islamic institutional investors to create solutions specifically for investment by Islamic customers. The Government welcomes Westpac's initiative. As Government, we want to get the policy framework right so the commercial aspects, such as the Westpac solution, follow.  I hope this is the first of many Islamic banking products, including for our superannuation and funds management industries.

Conclusion

In 2008, the Government established the Australian Financial Centre Forum to investigate ways to transform Australia's financial sector into a hub for the Asia Pacific, and to diversify our credit markets.  This is an excellent opportunity for us to continue to innovate and push our ambitions to establish Australia as a regional financial services hub.

The Forum's report recognises the great potential offered by Islamic finance.

In this regard, Austrade has an important role in bringing together the private sector, government agencies and the Islamic financial community.

In that light I'd like to congratulate Austrade and the Dubai Export Development Corporation for organising the visiting delegation from the UAE.

I'd also like to acknowledge the contribution of John Masters and PriceWaterhouseCooper in assisting in the preparation of the Austrade publication I am launching today.

And I would like to recognise the initiative shown by the state governments of Victoria and New South Wales who have been early promoters of the opportunities offered by Islamic finance.

Finally, I'd like to express my appreciation to government agencies, industry associations and the private sector for their collaboration and support in developing an Islamic finance industry in Australia.

This publication is the first comprehensive guide to the practice of Islamic finance and the opportunities for Shariah-compliant investment in Australia.

I am pleased to declare the publication, Islamic Finance, officially launched.

Thank you.